Chris DeMuth's state of the markets May 2022 (Podcast #106)

Chris DeMuth returns to the podcast to discuss the state of the markets in May 2022.

Please follow the podcast on Spotify, iTunes, or most other podcast players, as well as on YouTube if you prefer video! And please be sure to rate / review the podcast if you enjoy it, or share it with someone else who would enjoy it (more listeners is a critical part of the flywheel that keeps this Substack and podcast going!).

This podcast is brought to you by Tegus. I use and love both Tegus and Bamsec (which Tegus recently bought); you can find some of my work with Tegus in my cable deep dive here.

Disclaimer: Nothing on this podcast or on this blog is investing or financial advice; please see our full disclaimer here. The transcript below is from a third party transcription service; it’s entirely possible there are some errors in the transcript!

Transcript begins below

Andrew Walker: Hello. Welcome to Yet Another Value Podcast. I'm your host, Andrew Walker. And with me today, I'm excited to have my friend, the founder of Rangeley Capital, Chris DeMuth. How's it going, Chris?

Chris DeMuth: Good, how are you?

Andrew: Doing good. Hey, let me start this podcast the way I start every podcast. First, a disclaimer to remind everyone: nothing on this podcast is investing advice. We're going to talk about a bunch of situations today. Some of them we've probably done a lot of work on. Some of them were probably first time by the seat of our pants. Everybody should just remember that, please, consult a financial advisor, do your own work, all of that. Second, a pitch for you, my guest. You're my partner at Rangeley Capital. People can go listen to you are-- We did a podcast earlier this year on RENN, which I think is the best performing stock that we've done on the podcast. Maybe I should knock on wood real quick but that's been just an absolute killer. People can go listen to that if they want an in hindsight, great stock idea, or if they want the original pitch. I'm excited to have you on. I think we're going to start doing a monthly kind of "What's going on in markets," "What's going on in bet land." We used to run a separate podcast we're going to this every week. I think we're searching this monthly I'm looking forward to it. Yeah, I'll just turn it over to you. What's going on in markets, Chris?

Chris: Well, the microphone, I'm just looking over my shoulder that we used to record on, it's all set. Once we're back in the office and ready to go, it'll be nice to do that. Since we spoke about RENN, there's been a lot going on. I was one of 3 shareholders on the steering committee for dealing with the mediation, and we've gotten through that. We couldn't talk about it for a while. I think now, we basically can. That is unresolved but promising. It looks good enough to be happy about but is unresolved enough to not want to jinx it. So, I'm not striking the football, but I'm not-- Sorry about how it's going so far.

Andrew: People can go listen to the first podcast. There was in December, we were about to spike the football, and then there were some unexpected things that happened there. The stock got hammered. We looked and we said, "We think this is an overreaction. We think it's all going to work out in the end." But this is one we certainly don't want to spike the football on.

Chris: RENN has been like the S&P this past week. But if you looked at it at the beginning and looked at it in the end, it was, kind of, plotting and miss all the drama in the middle. RENN's, kind of, working out the way we might have thought before all the drama. Now, it's, kind of, a back to a fairly normal situation. That's been a big time consuming research project and it's been very [inaudible] I think that's been a good one, and that it has nothing to do with the market, whatsoever. So, that's been kind of a pretty tough...

Andrew: Let me pause you there. You said, "[inaudible] nothing to do with the market, whatsoever." Generally, in these podcasts, most of the time, I talk to someone and we focus on one stock and we dive right in. A lot of time when they tried to bring Microsoft something like, I don't want to talk about that. I just want to talk about one stock idea. But you and I, we're here. We're doing a monthly event-driven podcast. I think it would be to talk event-driven without talking about-- We're taping this May 9th. The stock market is down 3% today. Last week, he got hammered. In the past 6 weeks, it's got hammered. My favorite index, the Russell, is down by probably 27%, 28% over the past 6 months, which is a pretty big drawdown. I just want to high-level zoom out before we even talk about any situations, like, how are you thinking about the market right now? What are you thinking about these days?

Chris: Well, I would say that it's nice to have liquidity, flexibility, and cash to put to work. We've been, as recently as this morning, trying to think about making sure we're exposed enough. I think that I'm certainly most comfortable around situations with fairly hard catalysts so we can know within a few weeks or within a few months if we're basically right. So we can kind of succeed or fail, but not kind of get sucked into something. Certainly not sucked in terms of P&L and certainly not sucked in, in terms of liquidity. So it's, it's kind of a time that I like really hard catalysts. I don't love the merger of our market right now because of regulatory concerns specific to the US. So kind of US regulatory situations, I'm very, very light on and kind of looking for more broken situations. But it's interesting to me that in thinking a lot about corporate events, that buyers are still there. The credit market is open. Financial buyers are still there. Strategic buyers are certainly there and there might be some kind of opportunistic recuts or more price [inaudible], but it takes more than this to really blow up the deal market. And so I think that that's positive and optimistic deals are getting done. Deals are getting done at big premiums well above where even pretty widely projected deals were expected to. So I think the corporate side, there's still functionality at the retail side. There looks like there's a lot of bearishness in terms of the, kind of the sediment indexes that I think are pretty useful to look at are super bearish right now. And so that might be polish.

Andrew: Let me, let me go back to the corporate side. Because I think both you and I have been surprised. We've seen a number of things and I'll just say like, the way it's played out is Bloomberg reports, Rotor reports, somebody, very credible reports. Hey, this company is shopping themselves, right. And the stock trades at $10 and the stock runs to $11 because they say deal free deals.

Chris: Sure.

Andrew: And then markets drift and everything falls apart and never anything bad that comes up. Companies [inaudible] bidders aren't interested. The company's having to that nothing comes up, but these doctors back to $10 or something, and then 6 weeks pass, you know, it takes time to do a deal. And then there's announcement that says, "Hey, there's companies for sale. They're sold, you know, 30% premium." I think the one we're thinking of most, most recently is Silicon Motion Technology, which it announced an official deal last week. And that deal had been rumored. There was a pop, it gave it all back, and then boom hits. And I know there've been several other that we talked about you know,[inaudible] earlier this year. Now, this was this summer sound like 20% since then. But there was rumors that they were going to have a deal. People confirmed there was process and they gave all of it back and then sure enough deal at $11 comes. And now the deal's in question for other reasons. But I've been really surprised by that. It's been a really interesting thing. Do you think that's a function of people just, you know, two weeks after a deal off the market's down 8% Ukraine happens, all this sort of stuff people are saying, "Oh, maybe the world change and buyers just aren't as interested," or do you think there's something else going on?

Chris: Well, it's certainly legitimate that whenever the kind of inverse of the market implied probability of the deal is the downside's going down proportionally. So there's some, there's some legitimacy in that, certainly. And, and there could be skittish buyers. Although my history of checking back in with buyers, comparing notes after things are public and done, is that my sensitivity and worry about their worry was like 10X more than they ever thought about it. Certainly at the minute level, right. A 30% drawdown is something C level executives certainly pay a lot of attention to, but if you divide that up into a 10th, every 3%, maybe something I think a bit about, but they really tend not to. So I think you know, and there's this and just inertia, it takes a while to get to a deal, they tend to want to and certainly, their advisors tend to want to kind of follow through with kind of more, and of course you shouldn't be buying a company from doing a quarter or that month, or certainly that week or day.

So I think that the downside is relevant at some level the buyer sensitivity. And then at some level also the credit market just shuts down in the credit market shuts down in this kind of abrupt increments. I mean, I remember talking with John Paulson's hedge fund their kind of research guys there that were very helpful. We were talking a lot in 2007, early 2008, and they were very kind of early end and skeptical of the credit market. And we're saying, watch the reverse breakup fees, watch the LBOs. And I had this kind of naive innocence about their reputational costs. Like, "Oh, they won't, they want to abandon deals because they're in the deal business." And they think how badly would hurt their reputation. And they're like, watch the reverse breakup fees, watch the LBOs. They will, they will break all of these deals. And the only one of the kind of category that looked like they had break that survived was a single deal that eventually went bankrupt after at LBO. But that looks like the worst of all of them but they really did. And so you get to this credit increment where the LBOs really just all kind of fall apart. And so that's something I'm certainly thinking about, but as of now, the credit market seems to be pretty open.

Andrew: Yeah. It seems pretty open to me even this morning, like Frontier, which is not in any type of deal situation or anything. I just think it's an interesting thing, but they came out and they're raising debt, and it seems like the debt's going to price. It's going to price at terms that I think are like, kind of high, but you know, this is a company that was bankrupt a year ago and they're raising 8-year debt. Yeah. You're probably going to pay up a little bit for 8-year debt when you were bankrupt last year. Like they're getting it priced. It seems like they're going to be able to move forward. So it seems like that are open. Let, let me ask another question. So SEMO last week, right? That was a strategic buyer that bought them. I think one that you and I have thought about a lot is Kohl's.

Chris: Yes.

Andrew: Kohls there's KSS. I put an article up over the weekend. I link to it in the show notes, but the basics are, there are a lot of financial buyers in there and every week it seems we get a news new article. That's like, here's another buyer who's out here offering $68 per share to Kohl's. And as, as we're speaking, I think Kohl's is $51. And I have been wondering today, and I know you and I have talked about it. Like, is there any signal in the Kohl stock price where, because Kohl get approached by-- it's not strategic buyers, right? It's not, Macy's buying Kohl, it's Brookfield buying Kohl or Franchise Group buying Kohl because it would be strategic or financial buyers. Is there more signal in the Kohl's stock? Is there more signal in the current volatility where, "Hey, maybe strategics can still get deals done, but financial buyers are going to start reassessing real fast based on this environment."

Chris: Yeah, no, I think Kohl's at under $52 is more of an opportunity than a data point, but it's a bit of both certainly directionally in down to $50ish to $52 with like multiple pretty well vetted not like buyers confirming, but like a journalist that double our triple source kind of indicating that there are a number of bidders.

Andrew: I think we can say buyers confirming, right? Because ACTG, which is backed by Starboard put in an SEC filing that they bid $64 for Kohls. That was the first that we knew of and Franchise Group in their earnings Kohl's. They didn't say, Hey, here's the number we did, but they basically confirmed interesting Kohl's multiple times on their earnings Kohl's. So I think at least we've got two on the record bidders. And then as you said, New York times reported one bidder, Bloomberg reported another bidder, Reuters reported. So like, we've got multiple, this is not New York post. Just rumoring about it. Though they also did remark about it, but this is multiple confirmed sources.

Chris: And I look at this and just think the bidders know the credit market and they have a very good idea of what they can get out of Kohl's in terms of sale-leasebacks in terms of using its cash flow to finance a very large part of what they would have to pay. Now, interestingly as I talk to real estate people, it's always a little bit more complicated than just the financial engineering from a distance that you would like to put on this. The more you know about the specifics of the real estate, the harrier it is to do all of the things I would do with it in terms of how you could just physically redo the stores. And if you needed to shrink a footprint who else you like, it's just, you know, there are things about the signs and the specifics to the parking and so forth that makes it less flexible than it is in my imagination.

Andrew: I think your hand way would be all right Kohl's. The parts store and they own a bunch of great real estate. Well, I think I heard that argument with JC Penney in 2010, with Sears in 2007, with Macy's in 2016. And how's that work for any of them.

Chris: Exactly, exactly. And so now's the time that I think it's going to work, but yeah, no, they think that could be a bit of a bellwether. But I mean, this category of kind of pre-ARB we're taking out candidates right now, I think, I think it's still a pretty good one. It's certainly helpful. It's something that you wouldn't hate to own as a standalone where there's a few other ways to win. You know, both in terms of, if the deal market really does shut down, then you're stuck with the portfolio of things that you don't have to be a kind of price and sensitive rushed kind of ARB-like seller. But also because it might be a data point in terms of what gets done. So yeah, I think the pre-ARB stuff's good. I think the actual definitive ARB stuff for the most part, I mean, spreads are getting wider but doesn't tend to-- I'm so concerned about this regulatory environment and think there's a half dozen deals that I think the FTC and DOJ is going to want to block that I kind of feel like particularly lazy right now because I can always own everything else the day that those get blocked, right? Like everything tends to go wider and fairly conventional concern at this point. But I might throw myself in with there's not many definitive deals you have to own. I mean, we own a couple, and then what I think's really interesting is on the suits on the blocks that tends to be you know, really great time to at least consider setting them up. You know the likelihood that a company sells eventually, even within the next couple years when they've been in a broken ARB a situation is way higher than the average company.

Andrew: It's a signal, right? Like most companies, most boards like being on a board, pays nice money. Being the CEO of a company, pays nice money, not a lot of jobs up there, but once you've decided to sell once, like now as an investor, you know, this is a board that's at least willing to consider deals. And normally, like, you know, if you and I went through did a deal to sell whatever company we own and it went 6 months. And then for some reason, the deal couldn't fall through like you and I have probably already mentally decided we're selling this business. So, you know, yeah, we can't sell it the day the deal breaks, but 3 months later, 6 months later, we're probably out there thinking, "Hey sums up." So let me ask about the regulatory environment, because I think this is one you and I have been back and forth on, right? Like the regulatory environment, you can put it pretty bluntly, right? The Biden administration wants [inaudible] more than the Trump administration did, as long as you don't own CNN, if you don't CNN, the Trump administration [inaudible] wants deals. Right. But I do look at these spreads and I'm saying, I mean, the downside on a lot of these stocks is coming down all the time, but one that's been very popular recently is Activision Blizzard, which is in a deal to be bought out by Microsoft for $95 per share, as you and I are speaking is trading below $77. So that's a 25% spread to a deal. Now, the downside's going to be pretty big just based on Activision Blizzard has been a disaster. The NASDAQ is down huge since then, but you know, a 25% spread for a deal with a great a-buyer like Microsoft's really big. Obviously, this spreads there because of regulatory, but I keep looking at this and saying, Hey, it looks like this is priced-- You know, I think Microsoft would win in court and there's a chance that they don't even have to go to court. So it walk me through it doesn't have to be as specific. Why are you so bearish on just the regulatory environment in general right now?

Chris: You have activists. I and I'm bearish on 2 friends, I'd say I'm bearish directionally in terms of how many deals does this FTC and DOJ block, I'm bearish on what they do with M&A. And I'm also bearish on how analyzable it was because they're not classically kind of antitrust focused regularly. The head of the FTC kind of just graduated from law school and is a real zealot. So it's kind of like debating antitrust with them is more like talking about somebody else's religion than it's like comparing views on antitrust, which you can kind of, which is falsifiable and analyzable. So they tend to not like these companies, they tend to not like the deals and there's a lot that's going on. That's kind of punitive you know, we're not going to do early terminations on deals, even if there's no issue, you wait in line and you know, well, right. That has nothing to do with the merits. And while I said earlier that these companies shouldn't be doing a deal for a day or week or a month. Once you start delaying a deal by 6 months or 9 months or a year, that could be a high percentage of why this company was doing this deal at this time for this specific market. You could like, if you just say, you're going to be put on the bench for years, there's a lot of things you won't do and it'll make markets less efficient and less liquid. Their--

Andrew: Like Office Depot, Staples, which might merge now, but, you know, 5 years ago they were going to merge and FTC. But I think FTC was the one who blocked it there. If I remember correctly and they blocked it and it was like, Hey, I mean, I wouldn't have made that ruling, but you know, at some point maybe Office Depot, Staples they could have kept appealing at some point 1, but at some point like the retail Staples, business is going to go out of business. So, you know, if you agree to the merger in 2015, and it can't get done to 2018, well, that's here cash flows where your synergies are gone all this. And that was like a big piece of the reason you wanted do the deal. Right. So I'm definitely with you on that.

Chris: So I think it's reasonably likely that this deal gets done. Actually, I would say that the point at which I feel like these situations are more analyzable and we kind of get what we deserve. So that might be a loss that might be, we get to see what the downside is, but we're going to win or lose based on the merits. I feel much more comfortable in front of a judge than in front of these regulators. There's a lot of things going on where they're happy to bring suits, where they are making some point unrelated to the deal where that's just politics. And I think the judges, I mean, judges can be political, but I think it's more robustly related to the law. I think I've seen some pretty silly FTC and DOJ decisions. I've seen fewer silly decisions coming from judges. I mean, I disagree with them from time to time, but I think that I'll like that one. I think it's going to be lower later if they do get a suit. And that's one that, and even if this one doesn't get blocked, I think we even have other opportunities. As I said, like a dozen others get, you know, I think that there's going to be a-- Actually one of the funny things that a lot of the people in the antitrust bar have been talking about, and this actually probably would be an antitrust violation, is that they all just like certified at the same time, because if the FTC and DOJ really just wants to bring all these suits, they don't have enough litigators to like block everything. So you could just kind of like throw all your forces forward at the same time.

Andrew: Here's 20 certified compliance pick your two that you want to sue cause the other 18 are going through that's pretty funny. Let me ask you, acquisition Microsoft, right? Like the theory here is Microsoft, "Owns PCs," but they do own Xbox. So if you buy, you know, there's the theory where they buy Activision Blizzard, and they make Call of Duty exclusive to Xbox, Activation owns Kings. So they make Candy Crush exclusive to PCs, I guess. I don't know, but it reminds me of Time Warner-- This is probably more on the border than Time Warner AT&T where Time Warner AT&T media company merging with a phone company. I don't know a lot of people who really thought that was a concern, but how, you know, if you like Activision merging with Microsoft, I know a few more, but like, do you think they would have a chance in court cause I just look at the gaming, it depends if you defined it as gaming market or entertainment market, but either way I defined it doesn't seem like Microsoft buying Activision is going to foreclose on competitor, eliminate consumer choices or anything.

Chris: It's a theory. That's going to get a lot more traction with the regulators than it would with the judge. And there's been some signs with other things are looking at the same time that this kind of the is one that the regulators really are thinking about. But it depends on the judge, right? You always have some shot that you're just in front of somebody who has a lot of deference to the agencies. This is what they're supposed to be expert in. If you have somebody who has no background himself in antitrust, you know, the agencies, you know, [clearing throat] I've never been in the situation, but when you see a court case and it's, you know, the United States of America versus, any kind of have a certain amount of likelihood that they win. But no, I think Microsoft would have a very good chance of seeing this through.

Andrew: Do you need any-- I always struggle with this, right? Because obviously you never enter a merger agreement thinking, hey, we're going to get sued to block by the DOJ and we're going to have a year long antitrust battle. That's going to consume everyone's time and, you know, keep the lawyers, sending their kids to college and then the odds and everything. But do you think there's any like Microsoft knew the regulatory environment wasn't great when they entered into this deal. And I think it was October of 2021, they knew the regulatory environment. They obviously hired the best law firms, the best legal advisor advice. Now you could have said the same about AT&T Warner or any hundred other deals that have been sued to block but do you put any weight into Microsoft looking at this deal and saying, "Hey, we're going to sign this contract. We'll be out." I think the break fees, $2 billion, which, you know, that's pennies for Microsoft, but they put $2 billion in break fees on the line, plus a lot of legal headache and time trying to get, do you put any increments in that?

Chris: I don't know. I was actually trying to think if I was going to push back on, has anybody announced a deal expecting to have to go to court to defend it? And I would say, you know, Spirit, Tempo maybe and JetBlue, Spirit probably they think there's a pretty good shot. I mean, so every once in a while that you have one, and of course they, antitrust lawyers love it. Like they're, they're happy to do deal with it. But no I think that Microsoft they probably have a high confidence that they can be persuasive before it gets to court. They probably like their theory, however, and this is a little dangerous to the target. They probably think it would be a useful theory to test, right. Like, it'd be good for them to be able to get this deal done. And it would be good for them to know if they could and they of course have other things going on in terms of antitrust with the government. But they probably ultimately aren't playing games with us or they think that they can-- And in a normal time, I think it would be a cinch. And this time, maybe I'm more worried than there.

Andrew: Do you, I mean, obviously this got on a lot of people's radar because at Berkshire last week, Buffett comes out and says, "Hey, we bought almost 10% of the company." And I think the quote was, "We bought it for the spread and if the deal falls through, we'll see what happens or something," I think goes the quote. Do you put any credence into that?

Chris: I thought it was a very funny, like, kind of focusing Buffett. And it was like, there's got to be more analysis that he did on this, because it was kind of like, it was just almost like a cliche and he's careful to say it's not merger. It's not an arbitrage. It's what he used to call workouts. And he was very good at this back when there was like no competition and massive, massive spreads. And he made a ton of money especially back in the Buffett kind of partnership era.

Andrew: He did the what, even as recently as I think it was 16 or 17, he did the Monsanto Deere deal. If I remember correctly, that was a pretty wise [crosstalk].

Chris: And that worked out well, but in hindsight, and we had a good size position in Monsanto, but every once in while get done something and think, oh, we really were taking the risk. We thought we were Monsanto was a lot riskier than I thought it was the time as it turns out it was a terrible acquisition for the buyer and just, we got paid cash so day for us.

Andrew: That's another interest. So what Christopher is like a month after the deal closed, Monsanto lost a huge lawsuit in California on, I think it was roundup causing cancer quickly. I don't mean to make light of it that was just basic. And they owed billions and billions and billions of dollars. And obviously Deere is the buyers on the hook. And I don't think many Monsanto shareholders were really building that downside into their model, but you know, that's another interesting one because Deere, you know, they giant company doing a multibillion dollar acquisition. They got to look into Monsanto's books. They got to look at all the I'm sure they looked into the legal risk for this roundup thing and much like shareholders had probably dismissed it. And now they're on the hook for billions and billions of dollars.

Chris: Yeah. And I disagreed with how the decision worked out but should have probably been more humble and worried about it than I was. You know, it's interesting. You have a little bit of opposite dynamics in at ATVI and Activision as we do in Twitter. Right. Because we have this alternative world. If the deal doesn't get done, I think it's actually decently likely both deals get done. But if Activision Blizzard breaks, you have a data point that at least Berkshire would like to own it and own it right around the break price anyways. Right? Like they were buying it ahead of time, and then Buffett himself added. And then you have Twitter where you have the opposites where not only do you have the potential for the break, but then the buyer becoming a seller. Right. So you know it could break even uglier as a result.

Andrew: That's a great transition because Twitter's the other one I wanted to talk about. That's a, a popular one. I'm sure we're going to get a couple of buzzword SEO optimizations from talking Twitter, but look Twitter, as we talk, as you mentioned, Elon Musk, has the deals to buy them for $54.20 per share, as you and I are talking, Twitter's at about $48 per share, that is a big spread that a 13%, 14% spread for a deal that, you know, it's all cash buyer. The richest man in the world is an all cash buyer here. I would think there shouldn't be antitrust. We can talk antitrust. I would think there should be antitrust for Elon Musk who can choose the majority shareholder of SpaceX and a car company. I don't see how we can't buy Twitter, but maybe, but you know, let's talk, what is the market scene? That's got the spread so wide here.

Chris: There's no antitrust by my standards kind of free market in economics-based antitrust standards. And there's no antitrust by Lina Khan, you know, progressive activists and, and Biden's, you know, he tells that kind of whole government, which is if there's something you're against, you use any power the government has, regardless of their statutory authority or focus to simply thwart things you don't like and benefit things you do like. I mean, this is something the DOJ has signed on explicitly. And I think the current FTC majority is the heart and soul of it. But even by that standard, there's just no antitrust issue with this. There's no FCC jurisdiction. I don't believe there's CFIUS jurisdiction. Although there's ambiguity, that's raised by the other equity holders that are coming in, but there's nobody else that's going to have control.

So there's should not be CFIUS jurisdiction. That's a little squishier. So kind of ticking off the list of what happens with this on a regulatory front, it should be very smooth ticking, you know, if this was a normal situation and then you go through like thinking about the ability of the-- If you stipulate the deal was announced by somebody who's kind of a willing sentient buyer and has fewer like embedded agency issues. It's one person. It should be extremely simple from a financing perspective too. So you go through HSR gets done CFIUS I don't think it's needed. There's really no foreign issues. And then not only is it a good premium with especially where compared to where trade otherwise. But if there is any opponent, they kind of can get bought off by being able to go on the private side.

So if you think it's worth less than this price, you take the money. And if you think it's more than this price and you're a major player, you invest alongside Elon. So the target votes a cinch, right. So it should get done. And my kind of dumb, dumb analysis is that it will. I mean, I think that you know, you probably looked at the Hindenburg research. I like their stuff. I read their stuff. This was a pretty short form bit of analysis. I think I would associate myself with everything they wrote as a caveat. I just think that you kind get paid enough based on where the stock price is. So I wasn't that impressed by [crosstalk].

Andrew: Did they put out a short on-- I did not see that yet.

Chris: I'll oh, okay. I should have said that. That was yeah, so they just, I mean, it was almost, it was just like a blurb on that, and the idea is mostly the market's missing the reprice scenario here. Elon holds all the cards. And if you look at, I mean, one thing that they're certainly right about was it was an unusual sale process. Like it's a weird board that owns almost no equity and doesn't really--

Andrew: I don't even think they use Twitter for the most part.

Chris: No. I mean I don't, I know we're both fans of Matt Levine and this has been some of his best work, but yeah no they have neither economic nor sentimental attachments to the company that they're the board off and so they're like, oh, sure, you can have it. [laugh]. And so it was kind of a weirdly attenuated process. I mean, usually from, in our perspective, you know, there's a certain Kabuki back and forth on almost like a middle Eastern bizarre where you have a price and then you kind of, you go back and forth and there's like, ah, no, sure, that's fine. But so basically saying he's in a strong position, he can come back. The downside's bigger. The performance announced some of the deal has been bad. And their subscriber numbers were somewhat inflated, not to level of materiality. I don't think enough that he could walk.

Andrew: You know, I guess the two things that jump out all the reporting suggest Elon basically waived all financial due diligence as part of the thing. So if he goes to you and tries to recut, like the contract does, I don't know how you try to recut. I mean, anybody can try anything, right? But you you need something to point to break a legal contract. And I don't know how you go to them and say, "Hey, your subscriber numbers worse," and be like, well, you waved due diligence. And we've got a contract that says material adverse clause, like this is carved out into the material adverse clause. And then the other thing I've been wondering, I don't know, but I've been tossing around, like you mentioned, with private equity firms, right? Like in 2007, a lot of people said, "Oh, these guys are in the business and doing deals. They have to consider their reputation." And private equity firms said, "Hey, when push comes to itself, like we want to, we want to make money and protect capital world." But I do wonder for Elon, like if he backed out of Twitter at this point now, right after all this, like, it does seem it like, it would be, I mean, maybe just the richest man in the world money talks, but it seems like it would be really tough for him to pull some, to do what he normally does going forward if he stiffed Twitter here. Right. Like he said, this was to be taken seriously. He subbed off a lot to co-investors he's raised money. It seems like it would be a real reputation hit if he walks. I don't know if that matters or not. I honestly don't, but yeah.

Chris: He didn't cut SolarCity, so he's not going to recut Twitter. I think we've probably thought about the price now more than he has you know, I think he's kind of moving on this company and he's kind of slashing increments that he has plans for it that it doesn't have the replicability issue that the LBOs have. It's not like he's going to be in this business, but it is pretty interesting to be a guy who can both bring this huge amount of your own equity have leverage on it with your friend equity, raise debt in the market. That's willing to lend to money against Tesla and bring on other post-deal equity holders in a way that kind of gets around the SEC stuff that he doesn't seem to like, but lets people come in, you know, if you can set a price and back to the, well, he's certainly can get the shareholder vote because everybody thinks it's worth more or less that price. And he can appease either sides, at least the kind of major holders. You know, that's a pretty big thing to be able to do to throw away for a couple bucks unless he needs to. I mean, I think the big risk in all of this is Tesla and I have no new Tesla thought other than if it falls apart as much as many, many other similar financially companies have in the last few months in the next few months, this deal could really get in trouble. You know, Tesla at half the price, a quarter of their price changes things a lot for Elon deal.

Andrew: I do think they got help there because correct me if I'm wrong, but all the syndication that he did for the equity, where he went to Brookfield and the Saudi's and everything, I think that reduced the requirement on the margin loan side. Right.

Chris: That helps a lot, that helps a lot, that helps a lot. And, and just his ability to do that as fast as he did. But in terms of his sensitivity and what-- In terms of thinking about his behavior I think he closes this deal at this price with Tesla at this price you know, if Tesla really imploded, you know, would that change things for him? You know, that's what, I'm not sure.

Andrew: What, one more question, Twitter reports results on April 28th, if I remember correctly and they, he does all the equity syndication, I think May 4th is the bill that's officially signed. So if he tried to walk away from Twitter, couldn't Twitter point and be like, "Hey, not only is this not an MA, but you syndicated equity capital on May 4th with our results in hands," like that isn't that a real bad look?

Chris: Yeah. No, I think it would be as a Twitter shareholder, you're not happy about thinking of your prospects in front of a chancellor kind of quibbling about corporate law and what is, and what isn't a Mac. But I think the company would have a really good case there. So no, they'd be on the side of the angels. But that would only be partial solace for an equity holder.

Andrew: What else should we be talking about.

Chris: Energy.

Andrew: Energy? Yeah, go ahead.

Chris: I think we've been thinking we have one of our kind of top three positions this year in it, although it was really, we kind of backed into the energy exposure because in large part, because of our interest as a kind of special situation there, but we've been kind of peeking--

Andrew: For those who don't-- Chris is referring to amplify energy. Yeah. Which we you've done two podcasts on with Tim Weber. He was great. And it's worked out really well so far. So that what Chris is kind of referring to.

Chris: Yeah. And we're kind of as big in it as we can be. So we're kind of thinking about other things in the equity market, but boy, there seems to be a big disconnect right now between commodity prices and the equity prices. That should be pretty directly related. It's not quite as simple as this, but one of them seems to be wrong.

Andrew: Yeah. Look, I wrote about this on the weekend, over the blog, but just like, I keep looking at these companies and you know, let's say energy prices are up 10%. So their PV 10 is up 10%. Their stock prices will be up like 2% or something. And it seems, it actually kind of seems like energy goes up 10%. The stocks move 2%, energy goes down 10%. The stocks go down 10% like, and I'm shorthanded. I know there's a lot more complications in everything, but it just feels like the market is saying like, it's looking at, I understand oil is $100 right now. And the futures curve, you know, 12 or 24 months from now is $80 or $75. I get that. But the market is looking at that futures curve and it's saying, I know oil is $80 then, but I'm going to price this company. Like oil's going to be $60 in 12 months. And it just seems wrong. You know, like lumber. One of the things with lumber that I didn't realize, saw we started getting really into it is it's very difficult to hedge lumber. You know, it prices 10 months from now or a thousand. It's tough to go out and actually short like a thousand dollars worth of lumber for your deliver. Oil and gas it is not like that. Then the next 24 to 36 months are super hedgeable. So it's not a case like the company can realize that if they really want to. So I don't know what the market is telling us here.

Chris: And if you look at a lot of the geopolitical stuff, I mean, I think that there's more opportunities on the equity side to be rather precise in terms of, you know, onshoring and in terms of the commodity prices have been spiking in part on huge swaths of supply in certain geographies being unavailable, maybe for a pretty durable length of time. I mean, the industry people I speak with, I mean, even on Russia in particular are just fascinating in terms of just, the mechanics of turning pipes on and off. Like, I was wildly off guessing how easy it is to turn on supply that you've turned off for a while. I mean, there are pipes that take like years to get kind of they're designed to run. They're not designed to be flipped on. And so all of the things that have been disrupting supply and driving up commodities prices makes me even more interested in owning domestic supply and owning having access to the individual companies. Some of which that we've been investing in that are not affected by that. So I wouldn't have never guessed at this combination maybe in some part, just kind of chaos and equity market and kind of everything, bubble things coming down, everything has gotten really, really correlated in equities. And maybe there's this kind of correlation of one on panic days. But it seems like a really good opportunity.

Andrew: Yeah. What do you think-- One thing I've thought about I've called it going wild, kind of right. The market is forecasting that all of these energy companies are going to take their huge cash flows. And they're not the market's kind of not doubting the cash flow, but the market's doubting that they'll over get the cash flow, right? The companies will go wildcatter and drill, lots of wells that turn out to be uneconomic, do lots of awful, M&A, something like that. And that's one theory for the market's concern. So far, we haven't seen companies go wild. Like most of them are saying, "Hey, we learned our lesson in 2015. We're not going to go drill like crazy. We're going to take this cash, pay down debt, return it to shareholders." Do you think that the market is missing kind of that go wild cutter odds? Or do you think there's something else going on?

Chris: My experience with kind of-- especially small cap companies in industries where mostly extraction industries, but where the people involved are very specific to that industry. Like, you know, certainly oil and gas, exploration and production wildcatters and then like gold miners, like their whole lives are denominated in that thing. Like they'll never be great asset allocators, there won't be that they won't like pullback for 5 years or something like they're going to spend whatever and biotech that certainly can be the same thing too, but it's hard to have a lot of confidence in management from a generalist perspective that isn't always interested in that industry. So it's always one where I-- you know, I guess that's the reason why you'd generally like it's cleaner to own the commodity and equity, but that seems to be so overdone right now. And I don't know why it would be worse now than usually.

But part of my hope is that hope or part of my kind of bullishness is just market correlates with one in panics. And we're in kind of a mini soft panic right now, maybe by the time we check back in the market, maybe time this full on [inaudible]. Yeah. But and then secondly the new kind of special sauce to now or now is in the past in a year or so has just been how an investible this is for ESG mandates and including huge, huge asset allocators, including, huge pension funds and just mammoth companies with billions and billions of dollars that are really fixated on this measurement. I think the concept has a lot of flaws and I think how they implement it has a lot of flaws. But if we can be a counterparty to that, that is just probably my favorite place to be in the market right now.

Andrew: Let me ask you one last question on energy before we kind wrap this up.

Chris: Sure.

Andrew: You know, a lot has been made of maybe I should do a post or tweet on this, but a lot is made of Warren Buffett. You know, he's been buying Oxy up into the right. Like he's buying accidental every day. And I think he bought a lot of Chevron in Q1 as well. So oil-neck gas prices were rising. Ukraine was having all this and he was leaning into it. He was buying these commodity prices. And I've been wondering, and it's not just him, right. There are other very sophisticated, smart investors things. I don't know if we can throw our own heads in there, but who've been buying into the prices rising on partly the theory that prices are probably higher for longer, but also partly the theory that the stocks aren't moving anywhere close as much as the underlying commodity is. So you kind of get him by discount and I'm wondering, is there like signed there, or I do remember Buffett bought a ton of Chevron in late 2007, early 2008, and ended up selling it a couple months later at a big loss. So I wonder like is there something different this time or are we kind of repeating the mistakes of the past, where oil price, energy prices rise, and everybody wants to run out and buy them? It's like, no, that's the time you shouldn't be buying them. Does that make sense?

Chris: Yeah, and he of course, has so many fewer tools in his toolkit than we do in some regards. Right. Like there's a lot of cool stuff.

Andrew: The Exxon, the shell, he's got four names he can buy, that's it. Whereas you and I can go buy the smallest EMP company with an oil spill off the California, if we want to.

Chris: Yeah. I like ours better. At least in percentages, I might like his better in terms of dollars, but so yeah, I think as he has very few tools in his toolkit. If he has kind of a little bit of a thought on this they're big enough that he can actually put a decent percentage of Berkshire running into it. His timing's been wrong in this in the past. I think, no it's a data point. I think it's congruent in it, so yeah, I think that's it's a little like Activision, you know, peeking at what he's doing. You know it gives, I would hate to have that the entire thesis, but it's kind of, it lines up.

Andrew: Yeah, yeah. Just a thought that had been in the back of my head. And I hadn't really expressed it or even reconsidered it since a few weeks ago. So I thought I'd throw it off there. We've been going for about an hour. Anything else you want to chat about before we wrap this up or--

Chris: No, I think it's an interesting time in markets. I think talking my book thematically, I think it's a fantastic kind of golden era for event driven special situations like both in terms of, there's a lot of cool stuff at the corporate level deals are still happening. There's a lot of transactions. And I think the kind of bogie of the kind of directional market is going to be easier and easier to hit. So I think this is a cool time for this stuff that we think about and hopefully continues to work this year.

Andrew: Yeah. You know the common joke has been for the past the past 5 years or so, just owning Fang has been like hitting button. It's been so frustrating and hey, maybe we're entering the time where it's not, you know, owning Fang is the hard button and Bob Robotti called it, "The Revenge Of The Old Economy," you know, with energy stuff. And some of the other stuff we're talking about, it does seem like the real values. Like there do seem to be real miss pricing in some of these things. So, yeah.

Chris: Yeah. I mean the thing about you have that pivot and then you layer the ESG thing on top of it. And like one of the best places to invest over the past a hundred years has been in tobacco, which thematically, if you're just going to kind of try to predict the future, if you were soothsayer there, like, it'd be the easiest suit saying thing to say, oh, that's not the future that's but they've been really good money making companies really good equity investments. And I feel like ESGs going to push energy and more and more things into the category of it's going to be Philip Morris, like investing where it's going to be great for investors because of this weird anomaly of a supply and demand created on who's willing to invest in it. And so I think that if somebody is rational, self seeking, and probabilistic, I think that mindset has been kind of depressing versus what is [inaudible] call it versus thematic investing. And I think it could be really optimistic going forward.

Andrew: Perfect. Perfect. Well, look, this has been a lot of fun. I think we'll talk before then, but I think we'll do another one of these in a month.

Chris: Awesome.

Andrew: Listen to that and look forward to that.

Chris: And maybe in person.

Andrew: Say again.

Chris: And maybe we'll do it in person.

Andrew: Possibly talk to you this evening.

Chris: Thanks. Talk to you later, bye.

[END]